As for the questions you posed:
1) I touched on this briefly, but physical touch is not necessary. If he pulls away or is just in anticipation of the next step in the chain of events (playing ball) you don’t need to have physical contact. You are doing a great job of elongating the sequence verbally and with food/ play.
2)You work up to more hides by practicing. It is part of endurance training. There is a fine line between pushing boundaries and frustration. They don’t have to all be extremely difficult. You can have say- three very easy hides (lightly hidden in grass) and then two more complicated ones that get his brain turning. The other thing you can do is place many hides out there (keep one with you in your pocket) and then after he has had some good success, end the session, regardless if he has found all of the targets or not. If he finds a few and then is struggling and you think you should call it so he doesn’t get frustrated, that is where the target in your pocket comes in to play- where you will give him an easy one he can have success on, and then reward/ play and then you are done. Always end on a positive!
3) Outdoors is easier to a degree for some dogs, for a variety of reasons, one being that there are actual air currents to move scent around, as opposed to a house with stagnant air- and this may be the case for Blu. It is still important to practice indoors though (and will be good for Blu when he is recovering) as it can mimic heavily laden truffle areas- which is an incredibly valuable skill. To be able to pinpoint in a heavily laden area when scent is everywhere. That is an advanced skill we cover in 201.
We don’t want it to become routine for him, we want it to be fun, so yes, I would focus on outside and continue to work on endurance and soon it really looks like you could start burying the targets- but remember to when you start burying to keep the area small. Set him and you up for success. Also keep practicing blind hides if possible. You guys are doing great.
BUT do also hide things occasionally inside- maybe only 1 target or place three at a time and then after he finds all three- play- done- as he seems to key on lingering odor (such as the closet).
4) Absolutely keep training! It will make Blu that much better come next season and you can actually get out in the field. Do respect what his body is telling you though in terms of fatigue even if his personality says go-go-go. Kristin will likely have some good ideas on training during recovery.
Cold v. hot targets, yes that is good. Precision skills with a clicker- where he has to hit an increasingly smaller mark in order to receive a reward. Practice him nose targeting the odor source as well (this is something VERY useful later in the wild- and again, a skill we will cover in 201). All of those games can be played while lying down or with minimal movement.